Israeli shekel bills
Israeli shekel billsiStock

Moody's Investors Service on Friday changed the outlook on Israel's credit ratings to stable from positive and affirmed the A1 foreign-currency and local-currency senior unsecured and foreign-currency and local-currency long-term issuer ratings.

“The change of outlook to stable from positive reflects a deterioration of Israel's governance, as illustrated by the recent events around the government's proposal for overhauling the country's judiciary,” the credit rating agency said in its announcement.

“While mass protests have led the government to pause the legislation and seek dialogue with the opposition, the manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability,” it added.

“As a result, the risks on Israel's rating are now balanced, leading to a stable outlook. On the downside, while the deliberations about the exact form of the judicial reform continue, the government has reiterated its intention to change how judges are selected. This means that the risk of further political and social tensions within the country remains,” said Moody’s.

“On the upside, if a solution is reached without deepening these tensions, the positive economic and fiscal trends that Moody's had previously identified remain. All in all, the recent events offset the positive developments that had led Moody's to assign a positive outlook in April 2022, which related to strong economic and fiscal performance and the implementation of structural reforms by the previous government,” the agency stated.

“The affirmation of the A1 ratings reflects Israel's strong economic growth and improving fiscal strength which Moody's expects to continue in its baseline scenario. The economy has proven resilient to many economic and geopolitical shocks over the past decades and has grown at a rapid clip, helped by Israel's globally competitive high-tech industries. Moody's baseline projections assume continued robust growth in the medium term. The government's fiscal metrics have also improved rapidly after the pandemic-induced temporary shock, with the public debt-to-GDP ratio declining by ten percentage points of GDP within two years to 60.7% of GDP in 2022. Moody's expects a further decline towards 55% by the end of next year.”

Moody’s also said, “While the events since the start of the year have shown the strength of civil society, they have also exposed divisions in Israeli society, which run deeper than the judicial changes and will likely keep social and political risks elevated for some time. Greater polarization would risk undermining policy effectiveness and economic strength over the medium term. Hence, the recent events offset the positive developments that led Moody's to assign a positive outlook in April 2022, which related to strong economic and fiscal performance and the implementation of structural reforms.”

The announcements is in line with assessments made by senior economic officials in Israel on Thursday. Those officials said that the reason for the downgrade by Moody’s is the delay in the legislation and the negotiations on the judicial reform.

Last month, Moody’s issued an extremely unusual warning to Israel, saying that if the judicial reform proceeds as planned, the country's sovereign credit rating outlook could be downgraded from positive to stable.

In recent days, Prime Minister Benjamin Netanyahu and President Isaac Herzog spoke with officials at Moody's in an attempt to get the company to moderate the decision regarding Israel.

About a month and a half ago, the credit rating company Fitch confirmed Israel's credit rating at A+ level and left the rating outlook at "stable".

At the same time, the company issued a disclaimer stating that "the judicial reform could still have a negative impact on the country's credit profile."

(Israel National News' North American desk is keeping you updated until the start of Shabbat in New York. The time posted automatically on all Israel National News articles, however, is Israeli time.)